With the advent of a secondary market for life insurance policies, policy owners have an option in their management of life insurance polices. Due to various reasons such as retirement, health, changes in estate value, estate taxes or premium costs, the owner of a policy can now choose to sell the policy on a secondary market instead of surrendering the policy to the issuing insurer or allowing the policy to lapse.
FIG. 1 illustrates a typical insurance transaction flow between the policy holder 105 and the insurance company 103. An Owner/Holder 105 first purchases a life insurance policy, as signified by the arrow 110 from an insurer (Insurance Company 103) on the life of an individual. The policy has a designated beneficiary of the owner's choosing. The policy has a certain face value, for example nine million dollars, to be received by the policy's beneficiary as a death benefit upon the death of the individual insured under the policy. The beneficiary may be the Owner 105 or the individual whose life is insured by the policy (not shown), or another person designated by the Owner 105. The person whose life is insured may be the Owner 105 or another person for whom the Owner 105 has an insurable interest. At step 120 the Owner 105 of the policy pays a premium amount, for example five hundred dollars per month to the insurance company 103, for the policy over a certain period of time based on various factors such as age and health. As the Owner 105 of the policy pays the premium 120, a cash value for the policy may accrue if the amount of premium exceeds the policy's cost of the insurance. This cash value could vary depending upon the type of insurance policy, for example, term, whole life or universal life insurance, that is obtained. The policy may be redeemed by the Owner 105 for the cash value before the death of the insured. The cash value may also provide an additional amount of death benefit.
A life settlement is a sale of an existing life insurance policy by the Owner 105 of the policy to a buyer (Buyer), who is not the issuer of the policy. Typically, the purchase price for the policy is less than the face value for the policy, but more than its cash value.
FIG. 1A illustrates a typical a life settlement transaction 100. The life settlement transaction is designed to meet the insured's financial needs. Specifically, as the Owner 105 pays the insurance premium over a span of for example 30 years, various situations may arise in which the Owner 105 would need immediate access to cash, such as for repayment of loans, for retirement, for buying a business, for paying for healthcare, or when he otherwise would decide that he did not wish to continue making premium payments. Accordingly, in the life settlement transaction at step 130, the Owner 105 would sell the policy to a Buyer 101 for a designated price, for example three million dollars. At step 140, upon such an agreement, the Owner 105 would assign the Policy to the Buyer 101, and in exchange, the Buyer 101 pays the Owner 105 in cash. As a consequence, the Buyer 101 becomes a holder (“Holder”) of the policy. In addition, at step 150, the Buyer 101 begins paying the premiums for the Policy and at step 160 the Insurance Company 103 maintains the Policy but converts its owner to a Buyer 101. As such, the Owner's 105 liquidity is increased. Upon the death of the individual whose life is insured by the Policy, the Buyer 101 receives the face value amount of the Policy, nine million dollars.
However, such a transaction will usually have unfavorable tax implications because the cash payment from Buyer 101 to Holder 105 is subject to capital gains and/or income taxes. Accordingly, there is a need and desire for a life settlement arrangement that allows the Holder 105 to sell his policy while reducing tax liability. In addition, such a transaction will leave the Holder 105 with less insurance than he may desire. Accordingly, there is a need and desire for a life settlement arrangement that allows a Holder 105 to continue to hold an insurance policy, albeit with a lower face amount.
Moreover, there is a need in the art for a computer system and a computerized method that manages and administers life settlement transactions in order that substantial numbers of settlements can be efficiently implemented and administered.